What is Purchasing Power Parity and why does it matter?

Learn about purchasing power parity and how it impacts the country’s economy. See the top 10 economies by GDP-PPP and where India ranks

Last Updated: Oct 27, 2025, 15:11 IST4 min

Ever wonder why a McDonald’s burger costs much more in the US than in India? Of course, because people earn higher incomes on average in the US. But the technical term for this is purchasing power parity (PPP), which helps us compare the economic strength and living costs across different countries. It provides a clear picture of how much people can actually afford to purchase with their money.

The basics of purchasing power parity (PPP)

Purchasing power parity (PPP) is a widely used metric in macroeconomics that helps us compare currencies by examining what the same amount of money can buy in different countries. Instead of relying on market exchange rates, PPP focuses on a basket of goods purchased to measure economic growth and living standards more accurately.

PPP is beneficial for adjusting gross domestic product (GDP) figures, as it considers the price differences across economies. For instance, India’s nominal GDP places it lower in global rankings, but when adjusted for PPP, it ranks higher, reflecting the country’s lower cost of living.

GDP-PPP is calculated using:

Using PPP, experts, investors, and policymakers can much better analyse income levels, global trade balances, and overall economic well-being.

Why does PPP matter?

PPP-adjusted figures provide a more balanced comparison, especially for economies like India, where nominal GDP vs. PPP tells two very different stories. Beyond economic rankings, PPP plays a key role in understanding currency value.

For a country like India, PPP-adjusted GDP places it among the top global economies. The lower cost of living means wages and services are significantly cheaper than in high-income nations. For example, a haircut in Mumbai would cost far less than in New York. This pricing gap extends to healthcare, education, and housing, among other things.

List of top 10 economies by GDP-PPP

Here’s a list of the top 10 global economies by GDP-PPP, based on the data sourced from the International Monetary Fund on October 27, 2025:

Rank	Country	GDP-PPP (in $ trillion)	Global GDP (% share)
1	China	41.02	19.29
2	USA	30.34	14.84
3	India	17.71	8.49
4	Russia	7.14	3.49
5	Japan	6.76	3.31
6	Germany	6.15	3.02
7	Indonesia	5.02	2.44
8	Brazil	4.97	2.39
9	France	4.53	2.19
10	UK	4.45	2.16

India's nominal GDP vs. GDP-PPP: What does it signify?

India ranks among the world’s largest economies, but the way its economic size is measured can vary depending on whether we look at nominal GDP or GDP-PPP.

Nominal GDP is the value of the total goods and services produced in a country at current market prices, placing India as the fifth-largest economy in the world. Indian economist and Chief Economic Advisor (CEA), VA Nageswaran, mentioned that India’s nominal GDP might cross $4 trillion in 2025. In a press release, the Ministry of Finance also estimated a 10 percent growth in nominal GDP in FY 2026.

On the other hand, GDP-PPP adjusts for price differences across countries and presents a different picture entirely. While nominal GDP matters for global trade and investment, GDP-PPP tells us about the actual purchasing power of Indian citizens and economic growth.

How is PPP used?

GDP-PPP shapes the country’s economic strategies, and here’s how it’s applied:

Global economic comparison: Purchasing power parity provides a more detailed measure of economic productivity and living standards compared to market exchange rates.
International trade and investment decisions: Businesses use PPP to analyse the cost-efficiency of expanding into new markets. It helps financial experts to compare operational costs and pricing strategies required for international trades.
Currency valuation: For traders, PPP helps identify whether a currency is overpriced or underpriced and offers valuable insight into forex market shifts, trends, commodities, and indices.
Cost-of-living analysis: PPP helps compare real income levels and ensures better wage adjustments for multinational employees.

Drawbacks of PPP

While purchasing power parity does offer a useful way to compare economies, it comes with several limitations:

Transport costs: If a country relies heavily on imports, goods are usually more expensive due to shipping fees, fuel costs, and customs duties. This can make price comparisons between countries less reliable.
Tax impositions: Every country has its own tax policies, like VAT and sales tax, which can push up prices and affect PPP calculations.
Non-traded services: Many expenses, like rent, healthcare, education, and labour, don’t have a fixed global price. Since these costs vary by country, PPP may not always reflect the true cost of living.
Government regulations: Tariffs could raise the prices of imported goods, while these same products are usually cheaper in the exporting countries.

While purchasing power parity is useful, it’s best to look at it along with other economic indicators to get a complete snapshot of a country’s economic health, including India’s nominal GDP vs. GDP-PPP.

First Published: Oct 27, 2025, 15:48

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